Acclaro Blog

Acclaro Blog

2012 Contributions & Deductions Guide

February 6th, 2013

2012 IRA Contribution Limits Guide
Equity Trust’s Guide to 2012 IRA Contribution Limits

Of Taxes Past, Present, and Future

December 11th, 2012

With the 2011 tax filing season behind us, much attention is being paid to the expiring “Bush tax cuts”–the reduced federal income tax rates, and benefits, that will expire at the end of 2012 unless additional legislation is passed. In fact, though, several important federal income tax provisions already expired at the end of 2011. Here’s a quick rundown of where things stand today.

What’s already expired?

A series of temporary legislative “patches” over the last several years has prevented a dramatic increase in the number of individuals subject to the alternative minimum tax (AMT)–essentially a parallel federal income tax system with its own rates and rules. The last such patch expired at the end of 2011. Unless new legislation is passed, your odds of being caught in the AMT net greatly increase in 2012, because AMT exemption amounts will be significantly lower, and you won’t be able to offset the AMT with most nonrefundable personal tax credits. Other provisions that have already expired:

* Bonus depreciation and IRC Section 179 expense limits– If you’re a small business owner or self-employed individual, you were allowed a first-year depreciation deduction of 100% of the cost of qualifying property acquired and placed in service during 2011; this “bonus” depreciation drops to 50% for property acquired and placed in service during 2012, and disappears altogether in 2013. For 2011, the maximum amount that you could expense under IRC Section 179 was $500,000; in 2012, the maximum is $139,000; and in 2013, the maximum will be $25,000.
* State and local sales tax– If you itemize your deductions, 2011 was the last tax year for which you could elect to deduct state and local general sales tax in lieu of state and local income tax.
* Education deductions– The above-the-line deduction (maximum $4,000 deduction) for qualified higher education expenses, and the above-the-line deduction for up to $250 of out-of-pocket classroom expenses paid by education professionals both expired at the end of 2011.

What’s expiring at the end of 2012?

After December 31, 2012, we’re scheduled to go from six federal tax brackets (10%, 15%, 25%, 28%, 33%, and 35%) to five (15%, 28%, 31%, 36%, and 39.6%). The rates that apply to long-term capital gains and dividends will change as well. Currently, long-term capital gains are generally taxed at a maximum rate of 15%. And, if you’re in the 10% or 15% marginal income tax bracket, a special 0% rate generally applies. Starting in 2013, however, the maximum rate on long-term capital gains will generally increase to 20%, with a 10% rate applying to those in the lowest (15%) tax bracket (though slightly lower rates might apply to qualifying property held for five or more years). And while the current lower long-term capital gain rates now apply to qualifying dividends, starting in 2013, dividends will be taxed at ordinary income tax rates. Other provisions expiring at the end of the year:

* 2% payroll tax reduction– The recently extended 2% reduction in the Social Security portion of the Federal Insurance Contributions Act (FICA) payroll tax expires at the end of 2012.
* Itemized deductions and personal exemptions– Beginning in 2013, itemized deductions and personal and dependency exemptions will once again be phased out for individuals with high adjusted gross incomes (AGIs).
* Tax credits and deductions– The earned income tax credit, the child tax credit, and the American Opportunity (Hope) tax credit revert to old, lower limits and (less generous) rules of application. Also gone in 2013 is the ability to deduct interest on student loans after the first 60 months of repayment.

New Medicare taxes in 2013

New Medicare taxes created by the health-care reform legislation passed in 2010 take effect in just a few short months. Beginning in 2013, the hospital insurance (HI) portion of the payroll tax–commonly referred to as the Medicare portion–increases by 0.9% for high-wage individuals. Also beginning in 2013, a new 3.8% Medicare contribution tax is imposed on the unearned income of high-income individuals.

Who is affected?

The 0.9% payroll tax increase affects those with wages exceeding $200,000 ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separately). The 3.8% contribution tax on unearned income generally applies to the net investment income of individuals with modified adjusted gross income that exceeds $200,000 ($250,000 for married couples filing a joint federal income tax return, and $125,000 for married individuals filing separately).

 

 

Protect Yourself from Identity Theft

October 22nd, 2012

Identity theft happens when someone steals your personal information and uses it without permission. Thieves can run up your credit accounts, get new credit cards, medical treatment or a job – all in your name. Identity thieves cause a lot of damage – and they don’t just target the elderly.

There are several activities which, when made part of your regular routine, can help you reduce the risk of identity theft or the damage when it occurs:

  1. Monitor all your accounts on a routine basis – look at transactions each month to be sure that they are authorized and contact your financial institution immediately if you discover a problem.
  2. Read your credit reports from each of the credit reporting companies each year – you have a right to a free credit report every 12 months and can access these reports at https://www.annualcreditreport.com.
  3.  Remember to keep your anti-virus and anti-spyware software up-to-date and if you haven’t done so already, add a firewall to your home network.
  4. Keep your personal and financial papers secure and shred them before discarding them.

These are just a few suggestions – for more information, check-out the resources provided by the Federal Trade Commission, the Consumer Financial Protection Bureau, or the Consumer Federation of America.

If, despite your best efforts, your information does become compromised, act fast to limit the damage:

  1. Flag your credit reports by calling one of the credit reporting companies, and ask for a fraud alert on your credit report. The company you call must contact the other two so they can put fraud alerts on your files. An initial fraud alert is good for 90 days.
  2. Contact your bank’s fraud department to secure your personal accounts and ask for further guidance on securing personal information.
  3. Consider placing a “freeze” on your credit – the freeze should prohibit anyone from opening accounts using your name and Social Security number.

Identity theft can happen at any time and any place – the thieves may appear in person, online, or over the phone. Take precautions to secure your data and help your loved ones do the same.

Establishing a Budget

September 6th, 2012

Do you ever wonder where your money goes each month? Does it seem like you’re never able to get ahead? If so, you may want to establish a budget to help you keep track of how you spend your money and help you reach your financial goals.

Examine your financial goals

Before you establish a budget, you should examine your financial goals. Start by making a list of your short-term goals (e.g., new car, vacation) and your long-term goals (e.g., your child’s college education, retirement). Next, ask yourself: How important is it for me to achieve this goal? How much will I need to save? Armed with a clear picture of your goals, you can work toward establishing a budget that can help you reach them.

Identify your current monthly income and expenses

To develop a budget that is appropriate for your lifestyle, you’ll need to identify your current monthly income and expenses. You can jot the information down with a pen and paper, or you can use one of the many software programs available that are designed specifically for this purpose.

Start by adding up all of your income. In addition to your regular salary and wages, be sure to include other types of income, such as dividends, interest, and child support. Next, add up all of your expenses. To see where you have a choice in your spending, it helps to divide them into two categories: fixed expenses (e.g., housing, food, clothing, transportation) and discretionary expenses (e.g., entertainment, vacations, hobbies). You’ll also want to make sure that you have identified any out-of-pattern expenses, such as holiday gifts, car maintenance, home repair, and so on. To make sure that you’re not forgetting anything, it may help to look through canceled checks, credit card bills, and other receipts from the past year. Finally, as you list your expenses, it is important to remember your financial goals. Whenever possible, treat your goals as expenses and contribute toward them regularly.

Evaluate your budget

Once you’ve added up all of your income and expenses, compare the two totals. To get ahead, you should be spending less than you earn. If this is the case, you’re on the right track, and you need to look at how well you use your extra income. If you find yourself spending more than you earn, you’ll need to make some adjustments. Look at your expenses closely and cut down on your discretionary spending. And remember, if you do find yourself coming up short, don’t worry! All it will take is some determination and a little self-discipline, and you’ll eventually get it right.

Monitor your budget

You’ll need to monitor your budget periodically and make changes when necessary. But keep in mind that you don’t have to keep track of every penny that you spend. In fact, the less record keeping you have to do, the easier it will be to stick to your budget. Above all, be flexible. Any budget that is too rigid is likely to fail. So be prepared for the unexpected (e.g., leaky roof, failed car transmission).

Tips to help you stay on track:

  • Stay disciplined: Try to make budgeting a part of your daily routine
  • Start your new budget at a time when it will be easy to follow and stick with the plan (e.g., the beginning of the year, as opposed to right before the holidays)
  • Find a budgeting system that fits your needs (e.g., budgeting software)
  • Distinguish between expenses that are “wants” (e.g., designer shoes) and expenses that are “needs” (e.g., groceries)
  • Build rewards into your budget (e.g., eat out every other week)
  • Avoid using credit cards to pay for everyday expenses: It may seem like you’re spending less, but your credit card debt will
    continue to increase

Four Money Mistakes You Might Be Making

July 3rd, 2012

Four years after the economic crisis led many Americans to re-evaluate their financial picture, economic uncertainty is still the norm. While there’s little you can do about the shaky economy, you can help stabilize your own finances over the long term by evaluating what you’re doing right … and wrong. There’s no guarantee, but avoiding these four money mistakes may help you survive and ultimately thrive in any turbulent economy.

Mistake 1: Jumping on the bandwagon

Are you letting economic news–good or bad–control your financial decisions? For example, are you selling gold because you’ve heard that prices are at record highs or buying real estate because you’ve heard that prices are at record lows? Have you decided to pull most of your money out of the stock market because you’ve seen headlines warning of a possible financial crisis? Unless you’re basing your decisions on your own needs and circumstances rather than on the opinions or actions of others, you can’t be sure you’re doing what’s right for you. Instead of jumping on the bandwagon, take a proactive, rather than reactive, approach to your finances, no matter what economic news you’re hearing or what other investors are doing. Revisit your tolerance for risk and your own financial goals, and try to prepare yourself for a variety of scenarios. Avoid basing money decisions on emotion, or you may find yourself facing unanticipated consequences down the road.

Mistake 2: Only saving what’s left over

Do you continue to worry that you’re not saving enough? Do you routinely rely on credit rather than cash to pay for the things you want or need? Rather than blame your financial inertia on your income, look a bit deeper, because the real culprit may be the lack of financial priorities. If you don’t know exactly how you’re spending your money and you haven’t set financial goals, it’s unlikely that you’ll see much financial progress.

Go back to basics by preparing (or reviewing) your budget. If you tend to save only what you have left over every month, you can put yourself on a more disciplined course by having a fixed amount taken out of your paycheck automatically for retirement. Or, you can set up automatic transfers from your checking account to a savings or investment account.

Mistake 3: Not having an emergency fund

One lesson that you may have learned over the past few years is that the job market isn’t stable. That’s a major reason why one of your savings priorities should be an emergency fund. While it isn’t glamorous, this underappreciated workhorse really pulls its weight during hard times. Having cash on hand that you can use for an unexpected expense, or to pay bills if you lose your job, is vital because it can help you avoid having to rely on credit or tap your retirement savings. If you don’t have emergency
savings to fall back on, a minor money shortfall can quickly turn into a major cash crisis.

Mistake 4: Not asking for help

Even if your finances are in good shape right now, you may be overdue for a checkup. Reviewing your finances is especially important during periods of volatility because it can help reveal potential strengths and weaknesses, and identify changes you might need to make to adjust to the current economic climate. And if you’re already in financial trouble, don’t let fear or shame prevent you from asking for help. Facing financial problems early may help you make a full recovery. Many creditors are willing to work with you, but this may be much easier while your credit is still good, and while you still have time to turn things around.

Pay Down Debt or Save and Invest?

June 22nd, 2012

There are certainly a variety of strategies for paying off debt, many of which can reduce how long it will take to pay off the debt and the total interest paid. But should you pay off the debt? Or should you save and invest? To find out, compare what rate of return you can earn on your investments versus the interest rate on the debt. There may be other factors that you should consider as well.

Probably the most common factor used to decide whether to pay off debt or to make investments is to consider whether you could earn a higher after-tax rate of return on the investments than the after-tax interest rate on the debt if you were to invest your money instead of using it to pay off the debt.

For example, say you have a credit card with a $10,000 balance on which you pay nondeductible interest of 18%. You would generally need to earn an after-tax rate of return greater than 18% to consider making an investment rather than paying off the debt. So, if you have $10,000 available to invest or pay off debt and the outlook for earning an after-tax rate of return greater than 18% isn’t good, it may be better to pay off the debt than to make an investment.

On the other hand, say you have a mortgage with a $10,000 balance on which you pay deductible interest of 6%. If your income tax rate is 28%, your after-tax cost for the mortgage is only 4.32% (6% x (1 – 28%)). You would generally need to earn an after-tax rate of return greater than 4.32% to consider making an investment rather than paying off the debt. So, if you have $10,000 available to invest or pay off debt and the outlook for earning an after-tax rate of return greater than 4.32% is good, it may be better to invest the $10,000 rather than using it to pay off the debt.

Of course, it isn’t an all-or-nothing choice. It may be useful to apply a strategy of paying off debts with high interest rates first, and then investing when you have a good opportunity to make investments that may earn a higher after-tax rate of return than the after-tax interest rate on the debts remaining.

Say, for example, you have a credit card with a $10,000 balance on which you pay 18% nondeductible interest. You also have a mortgage with a $10,000 balance on which you pay deductible interest of 6%, and your tax rate is 28%. So, if you have $20,000 available to invest or pay off debt, it may make sense to pay off the credit card with $10,000 and invest the remaining $10,000.

When investing, keep in mind that, in general, the higher the rate of return, the greater the risk, which can include the loss of principal. If you make investments rather than pay off debt and your investments incur losses, you may still have debts to pay, but will you have the money needed to pay them?

When deciding whether to pay down debt or to save and invest, you might consider the following:

  • What are the terms of your debt? Are there any penalties for prepayment?
  • Do you actually have money that you could invest? Most debts have minimum payments that must be paid each month. Failure to make the minimum payment can result in penalties, increased interest rates, and default. Are your funds needed to make those payments?
  • How much debt do you have? Is it a problem? How do you feel about debt? Is it something you can easily live with or does it make you uncomfortable?
  • If you say you will save the money, will you really invest it or will you spend it? If you pay off the debt, you will have assured instant savings by eliminating the need to come up with the money needed to pay the interest on the debt.
  • Would you be able to borrow an additional amount, if needed, and at what interest rate, if you paid off current debt? Do you have an emergency fund, or other source of funds, that could be used if you lose your job or have a medical emergency, or would you have to borrow?
  • If your employer matches your contributions in a 401(k) plan, you should generally invest in the 401(k) to get the matching contribution. For example, if your employer matches 50% of your contributions up to 6% in a 401(k) plan, getting the 50% match is like getting an instant 50% return on your contribution. In addition, there are tax advantages to investing in a 401(k) plan

Got Tax Deductions?

March 14th, 2012

Here are some real life attempts at tax deductions that we do not recommend:

Not Internet – Interbird?
Two business partners in Arizona did not trust modern technology for communicating with each other. The two thought it made sense to communicate using carrier pigeons. So they attempted to write off the pigeons, as well as their care, food and housing as a business expense.

Flatter is Better?
Writing off breast enlargements has actually been approved as a business expense for exotic dancers. But one public personality added a new twist: she wanted to write off her tummy tuck as well. She argued that both larger breasts and a smaller stomach would translate into bigger tips on the job.

Fake Eyelashes?
Speaking of exotic dancers, they need to maintain their looks in order to rake in tips — and that means shelling out some serious cash for costumes and cosmetics. For years, one dancer in New York has been able to deduct the money she spends on looking good, including outfits, photos and makeup — even false eyelashes, tanning, teeth whitening and skin and hair care. The amounts vary from year to year, but typically it all adds up to a few thousand dollars.

Smile?
One job hunter tried to write off his dental implants as a job-hunting expense, arguing that he had a better chance of getting a job with a full set of pearly whites.

Dependent?
No matter how much you love your pet, be it a dog, cat, fish or pig, you can’t count them as a dependent on your tax forms and you can’t deduct their expenses. One individual wanted to write off the cost of the pig’s food and medical costs, which added up to more than $7,000. The tax preparer explained that it says in the tax code that it must be a person. The individual was disappointed and argued that he didn’t know what he was talking about.

Would You Rather?

March 7th, 2012

Many aspects of life require careful consideration and balancing of the tradeoffs that arise from competing demands. For example, a common lifestyle tradeoff is working longer hours versus spending more time with your family. The competing demands within this decision are the income necessary to provide a suitable quality of life for your family versus the immeasurable benefits of quality time with your family. There is no right answer, but most people understand the tradeoff and attempt to find the balance that is right for them.

Successful investing and financial planning also require balancing tradeoffs. For example, a common investment tradeoff is that of risk and return. One of the competing demands is preservation of capital versus preservation of purchasing power. The former may allow for a better night’s sleep during periods of heightened uncertainty and corresponding volatility, but the latter helps ensure you’ll have a comfortable bed in the future when accounting for rising prices from inflation. Once again, there is no right answer, no “optimal” solution. Understanding the tradeoffs between preserving capital and preserving purchasing power will help investors find the balance that is right for them. This balance will depend on their definition of risk and attitude towards it.

Some investors may consider risk to be volatility. They have difficulty stomaching the daily ups and downs associated with investing in asset classes that experience significant price fluctuations, such as equities, because declining prices are often accompanied by predominantly negative headlines. Although information will be reflected in prices before one can react to it, this is little solace to investors who extrapolate the recent past into the future and see the bad news as an indicator of what’s to come rather than a commentary on what has already happened. These investors yearn for short-term preservation of capital.

Other investors may define risk as a diminishing standard of living. They have long-term financial obligations, such as spending during their retirement years, and their primary goal is building wealth to meet those future expenses. They recognize that, while the cumulative effects of inflation are sometimes glacially slow or even undetectable in real time, inflation can be the silent killer of a financial plan. These investors desire long-term preservation of purchasing power.

Investing is relatively straightforward when the definition of risk and attitude toward it are so black and white. For example, you can virtually guarantee the preservation of capital by investing in the equivalent of Treasury bills as long as you accept the corresponding potential for the loss of purchasing power. On the other hand, you can preserve purchasing power by investing in asset classes with expected returns exceeding inflation, providing you accept price fluctuations that can temporarily impair your capital.

Unfortunately, in practice, investing isn’t that simple. Individual investors rarely have black and white objectives or well-defined definitions of and attitudes towards risk. Some expect long-term preservation of purchasing power and short-term preservation of capital. Making matters worse is the tendency for the priority and relative importance of their competing demands to change through time, often in response to what’s happened in the recent past.

Investors who succumb to the cycle of fear and greed end up chasing a moving target. Advisors can try to mitigate this destructive behavior by focusing investors on the tradeoffs that were made at the outset when determining their balance between assets that are expected to grow faster than inflation and those that stabilize the portfolio and reduce its fluctuations. So if an investor is now fearful and therefore more focused on capital preservation, it is time to reframe the tradeoffs by emphasizing why growth assets were in the portfolio to begin with and how the so-called “riskless” asset (i.e., bills) can actually be extremely risky in the long run.

More than ever, comparisons like these are needed when discussing the tradeoff of preserving capital versus preserving purchasing power. Investors feel the risk of equities in real time. Volatility is immediate and apparent as their portfolio value shows up in the mail every month or on their computer screen every day. Conversely, the risk of investing in bills and other low-volatility assets is less discernible and may take time to detect as it shows up when investors open their wallet at the grocery store or gas station many years later.

Investors may still want to revisit the tradeoffs they made and alter course if appropriate. However, changes to a long-term plan should reflect an informed decision rather than an emotional one. Fear and greed are powerful forces, but we should resist letting them dictate the tradeoffs we make in our lives or in our portfolios.

As the Most Interesting Man in the World would say, “stay invested, my friends!”

Maximize Your Deductions

February 21st, 2012

Did you know that US taxpayers itemize more than $1 trillion worth of deductions? $1,000,000,000,000, a number most of us have a hard time comprehending.  And those who don’t itemize claim about $700 billion using standard deductions.  Those of you who don’t itemize may very well be missing the opportunity for a larger refund.

Also, Child Care Credit: If you run your child care expenses through your employers flexible spending plan you are limited to $5,000. per year.  If you have expenses over $5,000. you can claim a credit of up to $1,000. more.

It’s very easy to miss one of the many opportunities to reduce your tax burden. A number of years ago, the head of the IRS at the time told Kiplinger’s Personal Finance magazine that he figured millions of taxpayers overpaid their taxes every year. So, we thought you might like to review the following article:

http://www.fivecentnickel.com/2008/01/30/twelve-commonly-missed-tax-deductions/

The Significance of February

February 14th, 2012

We are currently in a Leap Year, and February 29 is a Leap Day. And it is not just a day for the calendar to catch up with the earth’s rotation, it has significant social implications. According to an old Irish legend, or possibly history, St Bridget struck a deal with St Patrick to allow women to propose to men – not just the other way around – every 4 years. This is believed to have been introduced to balance the traditional roles of men and women in a similar way to how Leap Day balances the calendar.

In some places, Leap Day has been known as “Bachelors’ Day” for the same reason. A man was expected to pay a penalty, such as a gown or money, if he refused a marriage proposal from a woman on Leap Day. During the middle ages there were laws governing this tradition.

In many European countries, especially in the upper classes of society, tradition dictates that any man who refuses a woman’s proposal on February 29 has to buy her 12 pairs of gloves. The intention is that the woman can wear the gloves to hide the embarrassment of not having an engagement ring.

So watch out eligible bachelors!  This could get expensive.